BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON
                         BANKING AND FINANCIAL INSTITUTIONS
                             Senator Marty Block, Chair
                                2015 - 2016  Regular 

          Bill No:             AB 557         Hearing Date:    July 1,  
          2015
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          |Author:    |Irwin                                                |
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          |Version:   |May 28, 2015    Amended                              |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Eileen Newhall                                       |
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              Subject:  Nonprofit corporations: abatement: dissolution:  
                                     surrender.


           SUMMARY       Creates a streamlined administrative dissolution and  
          surrender process for nonprofit corporations, as specified.
          
           DESCRIPTION
             
            1.  Contains legislative findings regarding the cumbersome and  
              protracted process involved in dissolving a nonprofit  
              corporation's affairs and the importance of ensuring that  
              nonprofits which have been suspended or have forfeited  
              tax-exempt status are no longer able to do business in the  
              state or solicit donations from unsuspecting Californians.  

           2.  Provides that a nonprofit mutual benefit, nonprofit public  
              benefit, nonprofit religious, or foreign nonprofit  
              organization that has qualified to transact intrastate  
              business is subject to administrative dissolution or  
              administrative surrender if, as of January 1, 2016 or later,  
              the nonprofit corporation's or foreign corporation's  
              corporate powers are and have been suspended or forfeited by  
              the Franchise Tax Board (FTB) for at least 48 continuous  
              months.  This administrative dissolution/surrender process  
              works as follows:

               a.     Prior to the administrative dissolution or  
                 administrative surrender of the nonprofit corporation or  







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                 foreign corporation, the corporation must be notified of  
                 the pending dissolution or surrender, as follows: 

                     i.     FTB must mail written notice to the last known  
                      address of the corporation, as specified.

                     ii.    FTB must transmit the names of corporations  
                      subject to the administrative dissolution or  
                      surrender provisions to the Secretary of State  
                      (SOS).

                     iii.   The SOS must provide 60 calendar days' notice  
                      of the pending dissolution or surrender on its web  
                      site by listing the corporation name and the SOS's  
                      file number for the corporation.  The SOS must also  
                      provide instructions on its web site for how a  
                      corporation wishing to submit a written objection to  
                      the pending dissolution or surrender would do so.  A  
                      corporation wishing to object must submit a written  
                      objection to the FTB; the FTB must then notify the  
                      SOS that such an objection has been submitted.  

               b.     If no written objection to the dissolution or  
                 surrender is received by the FTB during the 60-day period  
                 to object, the corporation is administratively dissolved  
                 or surrendered.

               c.     Upon administrative dissolution or surrender, the  
                 corporation's liabilities for qualified taxes, interest,  
                 and penalties are abated; any actions taken by FTB to  
                 collect that liability must be released, withdrawn, or  
                 otherwise terminated by the FTB, and no subsequent  
                 administrative or civil action may be taken to collect  
                 all or part of that amount.  Any amounts erroneously  
                 received by the FTB may be credited and refunded, as  
                 specified.

               d.     If written objection to the dissolution or surrender  
                 is received by the FTB during the 60-day period to  
                 object, the objecting corporation has 90 days from the  
                 date its objection is received by the FTB to pay or  
                 otherwise satisfy all accrued taxes, penalties, and  
                 interest and file a current Statement of Information with  
                 the SOS.  If these conditions are satisfied, the  








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                 dissolution or surrender is cancelled.  If these  
                 conditions are not satisfied, the dissolution or  
                 surrender occurs on the 90th day following the date of  
                 FTB's receipt of the written objection, unless that date  
                 is extended by the FTB.  

               e.     If the nonprofit corporation or foreign corporation  
                 is administratively dissolved or administratively  
                 surrendered, the liability of the corporation and of the  
                 directors or other persons related to the corporation to  
                 creditors, if any, is not discharged.  

               f.     The administrative dissolution or administrative  
                 surrender of a nonprofit corporation or foreign  
                 corporation does not diminish or adversely affect the  
                 ability of the Attorney General (AG) to enforce  
                 liabilities as otherwise provided by law.  

           3.  Provides, under the Nonprofit Public Benefit Corporation  
              Law, Nonprofit Mutual Benefit Corporation Law, and Nonprofit  
              Religious Corporation Law,  that, when a corporation has not  
              issued any memberships, a majority of the directors, or, if  
              no directors have been named in the articles of  
              incorporation or elected, the incorporator or a majority of  
              the incorporators, may sign and verify a certificate of  
              dissolution, as specified, and may file that certificate of  
              dissolution with the SOS within 24 months of filing its  
              articles of incorporation.  The SOS must notify the FTB of  
              the dissolution.  Once that certificate of dissolution is  
              filed with the SOS, the corporation is deemed dissolved, and  
              its powers, rights, and privileges cease.  Notwithstanding  
              the dissolution of a corporation in this manner, the  
              liability of the corporation or its directors or other  
              persons related to the dissolved corporation is not  
              discharged, and the dissolution of a corporation pursuant to  
              this procedure does not diminish or adversely affect the  
              ability of the AG to enforce liabilities as otherwise  
              provided by law.

           4.  Requires FTB to abate, upon written request by a qualified  
              nonprofit corporation, unpaid qualified taxes, interest, and  
              penalties for the taxable years in which the qualified  
              nonprofit corporation certifies, under penalty of perjury,  
              that it was not doing business.  








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               a.     Defines a qualified nonprofit corporation as a  
                 nonprofit public benefit, nonprofit mutual benefit, or  
                 nonprofit religious corporation or a foreign nonprofit  
                 corporation that qualified to transact intrastate  
                 business in California and that either had its tax-exempt  
                 status revoked, as specified, or was never doing business  
                 in California at any time after its incorporation in  
                 California.

               b.     Defines qualified taxes, interest, and penalties as  
                 minimum franchise tax and associated penalties and  
                 interest for nonpayment of that tax.  Qualified taxes do  
                 not include unrelated business income tax (i.e., tax  
                 associated with activities unrelated to the nonprofit  
                 mission of the corporation) or tax imposed on income  
                 sourced in California but not related to business  
                 conducted in California or the interest and penalties  
                 associated with those taxes.

               c.     Requires the qualified corporation to establish that  
                 it has ceased all business operations at the time of  
                 filing the request for abatement of taxes, interest, and  
                 penalties, and conditions the abatement of taxes,  
                 interest, and penalties on the dissolution of the  
                 qualified corporation within 12 months from the date the  
                 request for abatement is filed.  

               d.     Provides that if the qualified corporation is not  
                 dissolved within 12 months from the date of filing the  
                 request for abatement or restarts business operations at  
                 any time after requesting abatement, the abatement is  
                 cancelled, and the taxes, interest, and penalties subject  
                 to that abatement are treated as if the abatement never  
                 occurred.  

           EXISTING LAW
           
           5.  Establishes the rules for dissolving different types of  
              nonprofit corporations, as follows:  

               a.     When a nonprofit public benefit corporation or  
                 nonprofit mutual benefit corporation has been wound up  
                 without court proceedings, a majority of the directors  








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                 then in office must sign and verify a certificate of  
                 dissolution stating that the corporation has been  
                 completely wound up; that its known debts and liabilities  
                 have actually been paid or adequately provided for, or  
                 that it has incurred no known debts or liabilities; that  
                 the corporation is dissolved; that all final returns  
                 required under the Revenue and Taxation Code have been or  
                 will be filed with FTB.  The certificate of dissolution  
                 must be accompanied by a written waiver of objections to  
                 the distribution of the corporation's assets issued by  
                 the AG or a written confirmation from the AG that the  
                 corporation has no assets.  The certificate of  
                 dissolution and attachment must be filed with the SOS.   
                 The corporate existence ceases upon acceptance by the SOS  
                 of the filing.  The SOS is then required to notify FTB of  
                 the dissolution (Corporations Code Sections 6615 and  
                 8615).

               b.     When a nonprofit religious corporation elects to  
                 wind up and dissolve, it may do so either by approval of  
                 a majority of the members or by approval of the board and  
                 approval of the members, as specified.  All of the  
                 corporation's assets must be disposed of on dissolution  
                 in conformity with its articles or bylaws, subject to  
                 complying with the provisions of any trust under which  
                 such assets are held.  The disposition of assets may be  
                 made without decree of the superior court, if the AG  
                 makes a written waiver of objections to the disposition  
                 of assets.  Nonprofit religious corporations are  
                 generally subject to the same rules for dissolution as  
                 nonprofit public benefit corporations, summarized  
                 immediately above (Corporations Code Section 9680).

               c.     When a foreign corporation that has qualified to  
                 transact intrastate business wishes to surrender its  
                 right to engage in business in California, it must file a  
                 certificate of surrender signed by a corporate officer or  
                 trustee, stating that it surrenders its authority to  
                 transact intrastate business and that a final franchise  
                 tax return has been or will be filed with the FTB, as  
                 specified.  The SOS is then required to notify the FTB of  
                 the surrender (Corporations Code Section 2112).

           COMMENTS








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          1.  Purpose:   AB 557 is intended to create a process to "rid the  
              books" of nonprofit organizations that either never launched  
              or are no longer operational, saving the SOS, FTB, and AG  
              the time and money involved in attempting to register, tax,  
              and audit these organizations.  

           2.  Background:   Under existing California law, the SOS, FTB,  
              and AG share jurisdiction over the administration and  
              taxation of nonprofit organizations.  The SOS administers  
              the incorporation process and ensures that nonprofit  
              corporations adhere to the missions for which they form.   
              The FTB evaluates, reviews, and monitors the state  
              tax-exempt status of nonprofit corporations.  The AG  
              regulates nonprofit organizations that administer or solicit  
              charitable funds or assets and has broad legal and statutory  
              authority to commence enforcement actions for improper  
              activities.  

          According to this bill's author, the current process to dissolve  
              a nonprofit corporation is very cumbersome, time consuming,  
              and inefficient.  

          In order to dissolve, a nonprofit corporation must first prepare  
              and file a Certificate of Election to Wind Up and Dissolve.   
              Nonprofit public benefit, mutual benefit, and religious  
              corporations holding charitable assets in trust must then  
              request a waiver of objections from the AG before disposing  
              of any remaining assets.  In order to obtain this waiver,  
              the corporation must submit information detailing the  
              persons to whom the remaining assets will be distributed; a  
              signed Certificate of Dissolution; a copy of the  
              corporation's federal tax returns for the last three  
              accounting periods; and an endorsed filed copy of the  
              corporation's articles of incorporation, including any  
              amendments.  Once it receives a letter from the AG waiving  
              objections to the distribution of assets or confirming that  
              the corporation has no assets, the corporation must mail a  
              final dissolution packet to the SOS, containing the letter  
              from the AG and the executed Certificate of Dissolution.  

          Once the SOS processes the corporation's paperwork, the  
              corporation is completely dissolved, and its corporate  
              existence ceases in California.  However, the organization  








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              must still submit a final notice of dissolution to the AG.   
              This submission must include a copy of the Certificate of  
              Dissolution filed by the SOS or written confirmation that  
              the Certificate of Dissolution has been filed with the SOS  
              and the final financial report for the corporation showing  
              that all assets were distributed properly, resulting in a  
              zero balance.  It is only after this final submission that  
              the dissolved corporation ceases to be subject to the  
              minimum franchise tax.  

          Because of this cumbersome process, it is estimated that close  
              to 60,000 of the 150,000 nonprofit corporations currently  
              "on the books" in California are eligible for the  
              administrative dissolution process that AB 557 seeks to  
              establish.  

           3.  Discussion:   AB 557 is virtually identical to AB 1529  
              (Perez) from 2013, a measure that was vetoed by Governor  
              Brown.  In his veto message, the Governor stated, "This bill  
              would make it easier to dissolve a nonprofit corporation.   
              Implementing this bill, however, will require expensive  
              reprogramming of an obsolescent computer system that will  
              soon be replaced.  It would be better to make this change  
              when the new computer system is being designed."   
              Assemblymember Irwin, author of AB 557, believes that the  
              May 28, 2015 amendments to her bill resolve the concerns  
              that led to the Governor's veto.  

           4.  Summary of Arguments in Support:   

               a.     The California Taxpayers Association (Cal-Tax) not  
                 only supports the bill, but urges lawmakers to expand the  
                 administrative dissolution and surrender process to all  
                 legal entities, not just nonprofit corporations, as other  
                 states like Colorado, Georgia, and Missouri have done.   
                 In support of the bill, Cal-Tax observes that "there is a  
                 significant problem with for-profit and not-for-profit  
                 organizations filing incorporation and registration  
                 papers with the SOS, and then failing to launch their  
                 operations without formally dissolving or surrendering.   
                 The result is a massive accounts receivable sitting on  
                 the state's books that will never be collected.  To  
                 properly unravel, such entities must spend considerable  
                 amount of time and expense, and go through a cumbersome  








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                 reviver process with the state, and then go through the  
                 dissolution/surrender process.  If an entity does not pay  
                 its tax liability, it generally is difficult, if not  
                 impossible, for the FTB to hold individual owners  
                 personally liable for the unpaid tax.  Unlike sales and  
                 payroll tax liabilities, the obligation to pay income and  
                 franchise tax begins and ends with the entity in most  
                 circumstances.  

               "The new administrative dissolution/surrender process to be  
                 created by AB 557 would allow the FTB and SOS to formally  
                 dissolve/surrender nonprofit entities that have been  
                 determined to be inactive.  For many of these entities,  
                 their boards of directors disbanded years earlier, but  
                 never took the proper steps to dissolve/surrender the  
                 entity, thus causing years of taxes, penalties, and  
                 interest to accrue.  Further, the FTB and SOS spend an  
                 inordinate amount of time and resources administering the  
                 dissolution/surrender process.  By streamlining the  
                 process to dissolve/surrender defunct nonprofits, AB 557  
                 would help the FTB and SOS to clear away the backlog of  
                 inactive nonprofit corporations, and save precious state  
                 resources."

               b.     The California Society of Enrolled Agents writes,  
                 "often taxpayers form business entities that never get  
                 off the ground, sometimes by attending a seminar.  The  
                 taxpayers barely remember forming the entities, do not  
                 file the right paperwork to keep the entities alive, and  
                 definitely do not have the funds to first revive the  
                 entity, which must happen in order to properly close the  
                 entity.  The cost of revivor, which includes paying the  
                 annual/minimum tax for each year, including penalties, is  
                 too costly for many.  Additionally, these 'phantom  
                 receivables' should not be carried in the state's  
                 Accounts Receivable, as most of the accounts will never  
                 prove collectible."  CSEA joins Cal-Tax in viewing AB 557  
                 as a good first step to expanding the administrative  
                 surrender/dissolution process to all entities, not just  
                 nonprofits.  

           5.  Summary of Arguments in Opposition:    None received.
               
          6.  Prior and Related Legislation:   








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               a.     AB 1529 (Perez), 2013-14 Legislative Session:   
                 Virtually identical to AB 557.  Vetoed by Governor Brown.  
                  

           LIST OF REGISTERED SUPPORT/OPPOSITION
            
          Support
           
          California Taxpayers Association
          California Society of Enrolled Agents

           Opposition
               
          None received


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